The importance of complying with court orders

When a court makes an order, the party or parties against whom those orders are made may well query what will happen if they do not comply with those orders. The recent decision of Palmer J in Zhang v King David Investments Ltd (in Liq) [2016] NZHC 3018 provides an example of the adverse consequences which can occur.

Ms Hsiang-Fen Ying was fined $10,000 as a result of "blatant contravention" of court orders (at [2]). Palmer J held that Ms Ying came close to being imprisoned, but in the end the fine was sufficient in the prevailing circumstances. If the payment of $10,000 was not made within 10 working days, his Honour noted she would be imprisoned for 20 days, or until payment was made, whichever comes first.

The decision also addressed the issue of setting aside orders obtained by consent. However, as that is not the focus of this brief article, it will not be discussed further.

Background

Ms Ying and her husband, Mr Jinyue Young are from Taiwan. Ms Ying was the sole director and shareholder of King David Investments Limited (King David). In March and April 2013, King David agreed to sell certain property to Ms Zie Zhang. The purchase price was $399,000 and Ms Zhang paid a deposit of $30,000.

Settlement did not occur and ultimately Ms Zhang lodged a caveat over the property and filed proceedings seeking specific performance of the contract and damages. On the morning of the second day of the trial, the parties agreed to settle and signed a settlement agreement recording as follows:

(a) King David would specifically perform the sale and purchase agreement by transferring the property by 13 September 2016;

(b) King David would pay $220,000 to Ms Zhang by way of a set off from the sale price on settlement; and

(c) the proceedings against Mr Young would be discontinued and the costs would lie where they fell.

By a Minute of the same day, Duffy J made consent orders giving effect to the agreement. By the terms of the Minute, leave was reserved to the parties to come back to the court for any further matter in relation to the proceeding, should the need to do so arise.

In the days after the consent orders were made, Ms Ying and Mr Young made several attempts to withdraw their consent to the agreement. For various reasons, the application to set aside the consent orders failed.

On 26 July 2016, King David applied for Ms Zhang's caveat over its property to lapse. Ms Zhang took no steps to defend that application so the caveat lapsed. This was apparently on the basis that Ms Ying (the director) considered that because Ms Zhang had taken no steps to defend the proceeding, she no longer wished the sale of the property to proceed.
Inconsistently with this belief, on 29 July 2016 Mr Young sought to appeal the consent orders to the Court of Appeal. The application was declined on the grounds of jurisdiction on 7 September 2016.

The caveat Ms Zhang had lodged over the property lapsed on the application of King House. On 30 August 2016, Ms Ying agreed to sell the property to a third party, Topcut Property Limited (Topcut) for $655,000. That sale settled on 12 September 2016. Before settlement, on 6 September 2016, Ms Zhang's lawyer emailed Ms Ying noting that settlement should proceed in accordance with the consent orders (i.e. that the property should be transferred to Ms Zhang). The lawyer stated that a failure to comply would elicit an application to hold Ms Ying in contempt of court.

On 21 September 2016, Ms Zhang applied to the High Court on a 'without notice' basis for orders arresting and imprisoning Ms Ying and Mr Young for contempt of court until they disgorge the proceeds of the sale of the property, and a freezing order over another property owned by the Ying and Young Trust. The application was directed to be served on Ms Ying and Mr Young, but still they did not appear on the day of the hearing. Instead, on the same day Ms Ying applied to put King David into liquidation. Palmer J found that the purpose of the liquidation was to avoid the consequences of the consent orders.

On 27 September 2016, Woodhouse J set the matter down for hearing and made various ancillary orders. This included an interim freezing order over one property owned by the Ying and Young Trust (i.e. a trust for the benefit of Ms Ying and Mr Young) and an order freezing the bank account of King David.

The decision on contempt

The law of contempt

Palmer J embarked on the analysis of the law of civil contempt by stating the following (at [39]):

The rule of law in New Zealand involved honouring court orders in order to uphold and protect the administration of justice, not just to required compliance with an instrument of state coercion. The law of contempt supports that wider purpose. …

His Honour then stated that the law of civil contempt is accurately summarised in a 2014 issues paper of the New Zealand Law Commission, Contempt in Modern New Zealand(Law Commission Contempt in Modern New Zealand (NZLC IP36, 2014) at [7.18]–[7.32]). The position was summarised as follows (citations omitted):

(a) for civil contempt, several elements must be proved beyond reasonable doubt:

(i) the terms of the order were clear and unambiguous, were binding on the defendant and the defendant had knowledge, or proper notice, of the terms of the order;

(ii) the defendant has acted in breach of the terms of the order; and

(iii) the defendant's conduct was deliberate in the sense that he or she deliberately or wilfully acted in a manner that breached the order.

(b) it is not open to a defendant in a contempt proceeding to challenge the validity of the order said to have been breached;

(c) the imposition of sanctions is within the discretion of the court, considering the extent of the contempt, the motive with which the defendant was acting and the degree of prejudice suffered by the innocent party. The following considerations are relevant:

(i) a penalty should not be imposed where there has been deliberate defiance of a court order;

(ii) sequestration temporarily places property of the contemnor in the hands of the sequestrators until the contempt is purged;

(iii) accidental or unintentional disobedience of the court would be unlikely to justify sequestration or imprisonment;

(iv) a degree of fault or misconduct would be required to justify sequestration or imprisonment;

(v) the power to imprison, for a maximum of three months, should be exercised with great care, and only as a last resort;

(vi) an injunction may be granted instead of committal to prison or sequestration;

(vii) fines are also an available penalty, taking into account the seriousness of the contempt and the damage done to the public interest; and

(viii) costs may be payable by the defendant if found guilty of contempt which may include indemnity costs.

Holding Ms Ying in contempt

As noted above, Palmer J held that Ms Ying was in contempt of court. The reasons for doing so can be summarised as follows:

(a) The terms of the consent orders were clear, unambiguous and binding on Ms Ying.

(b) Ms Ying clearly knew of the orders as she tried to challenge them.

(c) Ms Ying acted in defiance of the court orders by selling the property to a third party and not transferring the property to Ms Zhang. This action was deliberate.

Palmer J then made orders in order to vindicate the rights of Ms Zhang. This included payment of the value she should have received by the terms of the settlement and the order for transfer of the property. Interest was ordered on this sum, and Ms Ying was ordered to pay Ms Zhang's indemnity costs.

His Honour then made the order fining Ms Ying $10,000 for contempt, followed by the threat of imprisonment if the fine was not paid.

Conclusion

This decision highlights the importance of parties complying with court orders once they have been made. From this point a party only has limited options if they do not wish to abide by an order of the court. If you do not wish to comply with court orders, it is recommended you seek legal advice.

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